Are Households Spending More, or the Same, On Communications, as a Percentage of Income?

It is hard to tell exactly what percentage of household or personal income U.S. residents now spend on communications services, including entertainment video, mobile, fixed voice and Internet access.

One issue is that U.S. statistics collected by government agencies often do not break out “Internet access” as a category, though “mobile” and “fixed network voice” are counted. So there always is the possibility that Internet access should be added to estimates of “telecommunications spending as a percent of income” (household or individual).

Likewise, spending on “entertainment” often includes movie theater tickets, spending on pets and other amusements, not just linear or OTT video subscriptions.

Historically, one might have argued that U.S. households spent about two percent of income on communications (exclusive of video entertainment).

By about 2008, 2.5 percent of income was a reasonable description of consumer spending on communications.

Since then, it might be reasonable to argue that spending on mobility and Internet access services has grown. The caveat is that mobile average revenue per user likely has fallen, even if the number of users and connected devices has grown.

Internet access (fixed network) average revenue per account probably has been relatively flat. But some estimate Time Warner Cable has been able to obtain higher ARPU, growing from $40 a month in 2009 to over $54 per month in 2014, as users have migrated to faster tiers of service that cost more.

source: nScreen Media

All that noted, there likely is a bias towards a slightly-higher consumer spending percentage for fixed network communications services, since at least 1990.

But it is complicated. Much-higher spending on mobile services is countered by widespread abandonment of fixed network voice services.

Competition in the high speed access market is fierce, which arguably limits revenue increases, but higher-speed services costing more money also are gaining traction.

Video account prices tend to climb every year, but take rates also are dropping.

And, overall, most triple-play providers are bundling services, and offering consumers effective price discounts when buying such packages.

source: Bureau of Economic Analysis

A study by iYogi in indicated in 2012 that U.S. consumers spend as much as four percent of income on phone and Internet services, and certainly more than they spend on utilities. That math is not hard.

Utilities are “whole household” services, while mobile services are “per person.” Any household with multiple mobile users is likely going to spend more on mobility than utilities (electricity, gas, water).

source: iYogi

source: Michael Mandel

The main point is that it is very hard to tell whether the percent of income U.S. residents spend on communication services is growing or flat. The only unlikely trend is that aggregate spending is declining.

The other imponderable: is typical household income growing, flat or shrinking? Holding everything else constant, growing income reduces the percentage spend on communications. Shrinking income boosts the spending percentage.

Most of you would likely agree that there is only so much incrementally higher spending any household or individual will undertake, no matter how much more income grows.

On the other hand, most of you also would tend to agree that declining househld or personal income will likely lead to less spending on communications. That might, or might not, change the "percentage of income" metrics.

The bottom line is that upside spending growth is limited, while downside spending is more linearly related to income drops.

Mobile Represents 73% to 80% of U.S. Household Spending on Communications

In most U.S households, and definitely for households with more than the “mean” number of household members (2.5), spending on mobile services virtually certainly outpaces spending on all other services, as well as topping spending on component subscriptions (high speed access, all entertainment video and fixed network voice).

From 2007 to 2014, expenditures for mobile phone services increased from a range of 38.7 percent for one-person consumer units to 70.9 percent for consumer units of five or more persons, according to the U.S. Bureau of Labor Statistics.

One-person consumer units have the lowest share of cellular expenditures compared with telephone service expenditures for all household size groups, but the share increased from 49 percent in 2007 to 64.3 percent in 2014.

In contrast, fixed network voice accounted in 2014 for just about 27 percent of household spending. The perhaps-obvious question is how much is spent on high speed Internet access, something hard to glean from Bureau of Labor Statistics data.

source: Bureau of Labor Statistics

In households with five or more people, mobile accounts for about 80 percent of spending on “telecommunications.”

source: Bureau of Labor Statistics

source: Bureau of Labor Statistics

From 2007 to 2014, expenditures for mobile phone services increased from a range of 38.7 percent for one-person consumer units to 70.9 percent for consumer units of five or more persons.

One-person consumer units have the lowest share of cellular expenditures compared with telephone service expenditures for all household size groups, but the share increased from 49 percent in 2007 to 64.3 percent in 2014.

PC Market Still Growing in Latin America, Africa, Middle East; Ultraportables and Chromebooks

The personal computer market still is growing, despite perceptions of demise, according to researchers at ABI Research. In part, that perception is driven by the ways researchers categorize PC sales, now driven by portable units.

Also, sales growth also now is driven by buyers in Latin America, Africa and the Middle East, so growth might be as visible in Asia, North America or Europe.

To be sure, 2016 shipments of laptops wil fall nearly three percent, after a dip of one percent in 2015. But “ultraportable” shipments, which fell three percent in 2015, will grow nearly 11 percent in 2016.

And Chromebooks, which some might not consider “PCs,” grew 27 percent in 2015 and will grow about 21 percent in 2016, ABI Research forecasts.

Notebook PC Segment YoY Change (%)
	2015	2016
Chromebook	27.1%	21.2%
Laptop	-1.0%	-2.8%
Ultraportable	-3.2%	10.9%
Total	-0.5%	0.4%

source: ABI Research

Notebook PC Segment Shipments (Millions)
	2015	2016	2021
Chromebook	6.2	7.6	11.6
Laptop	129.7	126.1	116.3
Ultraportable	27.1	30.0	41.2
Total	163.0	163.7	169.1

ABI Research predicts that ultraportable PCs will constitute more than 24 percent of total notebook PC unit volume in 2021.

Chromebooks will continue to dominate the education market in 2016, as school initiatives drive toward 1:1 student deployments with a technology device.

And though the majority of Chromebooks historically shipped in the United States, the education trend is beginning to see growth in other regions, notably Western Europe.

ABI Research predicts that Chromebooks will represent nearly seven percent of all notebook PC shipments in 2021.

In all, data suggests regional growth from the notebook PC category will stem from Latin America, the Middle East, and Africa over the next five years.

Skinny Video Bundles a Logical Response to Growiing Consumer Resistance to Price Increases

Stability of consumer spending patterns is one reason why more linear video suppliers are embracing “skinny” content bundles whose primary attribute is that they cost less.

Since linear TV now is a core “telecom” product in consumer markets, that also means consumers will evaluate their buying choices through a very sticky lens. Households and consumers tend to spend only about two to three percent of income on all communications-related products.

When one category grows--such as mobility--some other category is dropped (such as fixed network voice). If spending on high speed access or any other component grows, then something else has to give.

Ever-higher linear TV bills are no exception. Facing such trends, consumers are going to cut back, to shift spending to mobile data and fixed high speed access.

Eventually, one might argue, they also might consider spending more on mobility and less on fixed services overall, if 5G starts to offer value-price bundles that support video consumption and high speed access requirements.

That--for decades--has been a hope of many mobile executives. The fundamental reality is that consumer budgets for all communication services (and that now includes many forms of entertainment video) is rather fixed. Prices cannot rise in any category without hard choices in other areas.

Device costs also are an issue. It is not clear whether $600 or $800 smartphones come out of a “consumer electronics” or “communication services” bucket. It likely is a combination of both categories. But that also means more attention will be paid to other services to deemphasize, so the pricey smartphones can be purchased.

Though U.S. households have gradually begun spending more on communications services over the past couple of decades, between 1990 and 2008, for example, the rise was fairly slight.

Consumers boosted spending from 1.8 percent of income to about 2.3 percent of personal income. Since 2008, some studies show a further increase.

At least one study of U.K. expenditures suggests communications spending could in some cases represent 12 percent of spending, while U.S. consumer spending on communications could have increased five percent, a possible historic increase level, between 2007 and 2010.

That five percent increase represents higher spending on linear TV, mobile and fixed services. Keep in mind, that does not mean the “percent of income spent on communications,” just the increase. Note that “telephone equipment” largely represents spending on mobile phones.

In fact, if spending on mobile phones and services has grown significantly, something else has given way. Since 2007, consumer spending on mobile services (per household, average of 2.5 persons per household) has been greater than spending on fixed services, according to the U.S. Bureau of Labor Statistics.  

By 2014, in fact, about 73 percent of all “telecom” spending per household was for mobile services.

in 2014, spending per household--including telecom and audiovisual equipment and services, amounted to about 4.4 percent of household spending. It is not immediately clear where spending for high speed access appears. If not captured by government data, then it is certainly possible that household spending on communications has reached five percent, or more, in some cases. It is hard to say for certain.

But the point is that consumer ability to buy communication services is rather finite. At whatever level you believe is current (2.5 percent to five percent per household), there will be resistance to increasing the percentage of spend much more.

That means prices cannot continue to climb, for every component service, without cutbacks, someplace.

So skinny video bundles appear an ever more likely response to consumer resistance to price hikes. Given a choice between spending less on Internet access, entertainment video, mobility or fixed voice, which priorities would you have?

"Wireless Substitution" for Video and High Speed Access is Coming

“Wireless substitution,” defined as customers choosing to buy mobile service as a full substitute for fixed network voice, is a well-established trend in the U.S. and other markets.

So the obvious question is whether wireless substitution could happen for other fixed network services, such as entertainment video and even high speed Internet access.

With the arrival of fifth generation networks, and some innovations in both rating and offload, that could become a commercial reality for the first time.

And that will have implications for service providers, consumers, devices and network platform choices.

Ask Verizon. “5G has the capability to be a substitute for broadband into the home with a fixed wireless solution,” said Fran Shammo, Verizon Communications EVP. “The question is can you deploy that technology and actually make money at a price that the consumer would pay?

“If you think about 5G, 1 gig into the home it is a substitute product for (fixed network) broadband,” said Shammo.

One reason that will likely be the case is that consumer preferences, network architectures, traffic offloading and new spectrum will allow mobile service providers to consider new offers never practical before.

Efficiency, and therefore mobile data costs, provide one example. “So if you think about CDMA to LTE, we got about a four to five time cost reduction,” Shammo said. “You're looking at the same magnitude, maybe even slightly higher going from LTE video delivery to 5G video delivery.”

The rest of the business model has to be proven, of course. But the main point is that 5G will allow mobile service providers to consider wireless substitution for fixed network video entertainment and high speed access as never before.

And that almost assures us that wireless will be a bigger factor in access network revenues, going forward.

Access Providers Cannot Get Away from Dumb Pipe Function

You know a market is changing when you begin to struggle with definitions. In many markets (Europe and North America), for example, it is less accurate than ever to talk about “telcos” when “cable TV companies” have so much “telecom” market share.

Likewise, it is clumsy to refer to cable TV companies that way when they actually are “telcos.”

People come up with “catchy” new phrases that capture some of the dynamics, but little of the revenue dynamics. Digital lifestyle enabler is one such term. The use of the phrase tends to connote that access providers are “evolving” beyond access (bit pipes, dumb pipes or some other similar designation) and becoming digital services providers.

That sounds good, even if it does not generally match revenue sources so well at the moment. Some of us would argue that the “dumb pipes” versus “digital services provider” debate is misplaced.

For starters, it is unlikely ever to be the case that any access provider actually earns more money from “services” or “content” or “apps” than it does from connectivity (access). And that is not necessarily a problem.  

A cable TV executive might describe the long-term strategy as a mix of services, ranging from “dumb pipe” (best effort Internet access) to Ethernet access for businesses, plus video entertainment and voice “managed services.”

In other words, both dumb pipe and services are foundations of the business model. But dumb pipe is not to be casually dismissed. In the full protocol stack, access and transport are at the bottom, apps at the top.

Access and transport are the unique roles provided by former telcos, cable TV companies, satellite broadband, metro fiber and many other types of specialized communications service providers.

An access provider cannot avoid offering access and transport without abandoning its role in the protocol stack. But neither are access providers precluded from assuming other roles.

As a cable TV exec might say, “you have to own some of what you deliver.”

That’s why all debates about “dumb pipe” or “app provider” roles essentially are wrong when they assume either one or the other roles must be dominant. The future is “both.” But access is the unique role. Any access provider that neglects the “access function” eventually will falter.

Access (dumb pipe is another word for access) is the unique role in the protocol stack. But it is unlikely to ever be the "sole" role or function.

India Mobile Data Margin Pressure is Growing

Margin pressure in the India mobile data services business already is escalating, even before Reliance Jio has launched full commercial launch of its 4G services.

Analysts at Morgan Stanley therefore have "cut our industry revenue growth forecast by three percent for fiscal years 2016 to 2018, and expect the industry revenue between fiscal 2015 and 2020 to grow at a seven percent compound annual growth rate versus eight percent previously."

As is often the pattern elsewhere, usage is growing faster than revenue . The report by Morgan Stanley said despite double-digit data volume growth, data revenues are now growing in the higher single-digits.